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A Blockchain-based Framework for Central Bank

Digital Currency
Xuan Han1,2 , Yong Yuan1,2 , Fei-Yue Wang1,2,3
1. The State Key Laboratory for Management and Control of Complex Systems
Institute of Automation, Chinese Academy of Sciences, Beijing, China
2. Qingdao Academy of Intelligent Industries, Qingdao, China
3. Research Center of Military Computational Experiments and Parallel System,
National University of Defense Technology, Changsha, China
Email: xuan.han@ia.ac.cn, yong.yuan@ia.ac.cn, feiyue.wang@ia.ac.cn

Abstract—Cryptocurrency and blockchain technologies have issued by any sovereign institutions, nor recognized by govern-
developed in parallel in recent years, with technological break- ments or trusted entities. In addition, decentralized cryptocur-
throughs in currency issuance, payment methods, and currency rencies are designed and maintained by various untrusted third-
storage. However, the existing cryptocurrencies cannot replace
fiat money. There is a huge gap between decentralized cryptocur- party agencies to actively develop and operate cryptocurrency
rency and central bank digital currency, namely CBDC, in terms and distributed blockchains, which may raise regulatory issues
of monetary governance and circulation. In this paper, we pro- for central banks or other regulatories. If decentralized cryp-
pose the function and security requirements of CBDC, through tocurrencies are widely circulated, their impact on payment
a comprehensive analysis of the existing typical cryptocurrency system supervision, regulation, financial stability and monetary
and the prototype of the CBDC scheme. On this basis, we present
a blockchain-based framework for CBDC with three layers, policy may become more prominent.
including supervisory layer, network layer and user layer, and The concept of central bank digital currency, CBDC, was
describe the key business processes of the CBDC’s entire lifecycle proposed in order to comply with the digital development
of issuance-circulation-withdrawal in detail. Finally, we take trend. CBDC can control the chaos of cryptocurrency schemes,
cross-border payment as an example to explain the transaction stabilize the financial payment markets and bring new oppor-
process of CBDC. We aim to provide theoretical guidance for
CBDC design. tunities for traditional financial infrastructure. It is not only
Index Terms—Central bank digital currency, blockchain, cryp- the digital expression of fiat money, but a sovereign currency
tocurrency, currency issurance, currency circulation recognized by the state sovereignty, issued by the central bank
and denominated in a specific fiat currency. It is usually issued,
I. I NTRODUCTION traded, retrieved and stored through encryption algorithm and
Cryptocurrencies originated from blind signature technol- other digital technologies.
ogy, aimming to solve the problem of anonymous payment [1]. At present, many countries take a positive attitude towards
The original E-Cash was a centralized, untraceable electronic the research and development of CBDC, believing that it
payment scheme relying on central banks to process and vali- can reduce issuing cost and increase transaction convenience.
date transactions [2]. The emergence of Bitcoin and blockchain Among them, the Bank of England commissioned of Univer-
technology has overcome the long-term dependence of elec- sity of London to develop a CBDC scheme, namely RSCoin,
tronic payment on trusted third parties [3]. Subsequently, which was the first CBDC system proposed by the central bank
cryptocurrencies based on blockchain are gradually becoming [9]. The Bank of Canada has been carrying out an experimental
decentralized. project called ”Jasper”, which aims to explore and create a
After more than 10 years of development, hundreds of payment system with CBDC technology, and will eventually
cryptocurrencies based on blockchain have emerged, creating launch the digital Canadian dollar, called CADCoin [10].
a series of influential innovations in all aspects of financial China has established the digital currency research institute in
markets and the wider economy [4], [5]. In particular, the 2014, and has taken the lead in formulating the strategic goal
potential impact of cryptocurrencies and blockchains on retail of developing CBDC, planning to release the CBDC system
payment services is crucial. These schemes make peer-to- in 2019.
peer payments easier and cheaper, and have the potential Although the cryptocurrencies have made some progress,
to facilitate e-commerce, cross-border transactions and some they cannot be directly used in CBDC design, due to the
retail payment transactions [6], [7]. difference between CBDC and cryptocurrencies. Meanwhile,
Cryptocurrencies such as Bitcoin based on blockchain have there are fewer CBDC programs published, which adds some
some monetary characteristics, however, there are still signif- difficulties to CBDC research and development. From the tech-
icant differences between the decentralized cryptocurrencies nical perspective, CBDC are facing the following challenges.
and fiat money [8]. First, these cryptocurrencies are neither 1. What functions and security properties does CBDC need

978-1-7281-2853-5/19/$31.00©2019 IEEE 263


to implement? In 1983, Chaum constructed the first cryptocurrency scheme
2. How to construct a CBDC framework to realize the using blind signature [1]. He constructed an anonymous elec-
function of physical currency? tronic payment scheme based on RSA-based blind signature
For the first question, CBDC should not only meet the func- algorithm in 1985, which has auditability, controllability and
tionalities of fiat money in the circulation process, including anonymity to some extent [2]. It was a classic case of cen-
the value scales, circulation means, value storage and payment tralized crytocurrency with a three-party model of bank-user-
means, but also should overcome new security challenges in merchant, which laid a foundation for centralized cryptocur-
the process of fiat money. As far as the framework design of rencies. In order to improve payment efficiency, Camenisch et
legal digital currency is concerned, there are two mainstream al constructed a compressed crytocurrency scheme, E-Cash,
models, account-based and wallet based. Account-based model under the assumption of RSA and DDH [11]. The following
can be built on the existing banking system and can achieve research considered the splitting and fusion of currencies on
a high degree of integration between CBDC and the existing the basis of E-Cash, so as to enhance the usability. Although
banking system. Wallet-based model is widely used in cryp- the centralized cryptocurrency schemes initially realized secu-
tocurrencies, which is more conducive to anonymous payment. rity, anonymity and traceability, there were serious efficiency
Blockchain plays an important role in the research and problems left and didn’t consider complex payment scenarios.
development of cryptocurrency, which can also be conducive Bitcoin was born in 2008, which alleviated the efficiency
to the establishment of secure payment and trust system of problem of centralized cryptocurrencies [3]. The use of hash
CBDC. Blockchain is an innovative technology with extensive function, blockchain structure and digital pseudonym partly
application potential, which can not only be used as the ensured the security and anonymity of payment process.
network structure of payment system, but also may be adopted Subsequent research focused on the security, anonymity and
by financial market infrastructure (FMI), having a positive efficiency of decentralized cryptocurrency. In 2015, Garay
impact on the financial system and other networks in the whole et al abstracted the backbone protocol of Bitcoin in the
economy [6], [7]. static synchronous network model and provided the security
In this paper, we take efforts to propose a CBDC framework definition and proof framework of Bitcoin [12]. Monroe and
based on blockchain. First, we study the existing cryptocur- Zerocash successively used ring signature and zero-knowledge
rencies and CBDC samples, and induce the functional char- proof to enhance the anonymity of payment. In response to the
acteristics and security properties that CBDC should to meet. efficiency of Bitcoin, a series of new consensus protocols and
Then, we present a three-layer structure of CBDC framework payment methods such as PoS Protocol, sharding protocol, and
based on blockchain, including regulatory layer, network layer lightning network were proposed.
and user layer, and introduce the key business processes in the
life cycle of CBDC in detail, such as identity authentication,
currency issuance, circulation and withdrawal. Finally, we
take cross-border payment as a use case to explain CBDC’s B. Central Bank Digital Currency
business process and the feasibility of CBDC’s three-layer
framework. CBDC is generally defined as the value of digital repre-
The remaining part of the paper is organized as follows. In sentation, electronic storage, and cryptographic transfer, that
Section II we introduce the backgrounds of cryptocurrency is expressed digitally, stored electronically, and encrypted for
and CBDC, and analyze the differences between them. In transfer of ownership. It is issued and managed by a sovereign
Section III, we induce the functional characteristics and secu- institution such as the central bank, subject to the laws and
rity properties that CBDC should to meet. In Section IV, we regulations applicable to a specific jurisdiction. CBDC is
propose a three-layer structure of CBDC framework based on another form of fiat money, similar to coin and banknote,
blockchain, including regulatory layer, network layer and user which can be effectively exchanged for cash in denominations.
layer. In Section V, we introduce the key business processes RSCoin, proposed by the University of London, is the first
in the life cycle of CBDC in detail. In Section VI, we explain CBDC framework published [9]. However, it only gives the
how CBDC works to achieve cross-border payment. Finally, grouping architecture based on blockchain, without in-depth
we conclude our construction briefly in Section VII. discussion on currency issuance, regulation, anonymity and
other aspects. At present, there are still many problems in the
II. BACKGROUND
requirement design and implementation of CBDC throughout
A. Cryptocurrency its whole life cycle. First, the functional requirements and
With Bitcoin as the boundary, cryptocurrencies can be security objectives of CBDC are not fully explained. Second,
divided into two stages: the cryptocurrencies represented the CBDC infrastructure framework is not clear. There are
by E-Cash and the decentralized cryptocurrencies based on still doubts about whether to adopt the secondary structure of
blockchain. It should be noted that electronic currency, virtual central bank-commercial bank. Finally, the data structure and
currency and digital currency are collectively referred to storage model of CBDC are not uniform. It is still controversial
as cryptocurrency in this paper, although they are slightly whether to adopt the wallet or account based model. These
different in design and application. have hindered the development of CBDC and made it stagnant.

264
C. Differences between Decentralized Cryptocurrency and double-spending, unforgeability, non-repudiation, verifiability
CBDC and anonymity.
Some decentralized cryptocurrency schemes can implement
anonymous payment, secure storage and so on [13], but there A. Functions of CBDC
are still significant functional differences between them and Centralized issuance: Centralized issuance is the most ob-
CBDC, as shown in the following aspects: vious feature of CBDC that differs from the general cryp-
Currency value: The price of decentralized cryptocurrencies tocurrencies. It means that CBDC is backed by the sovereign
is determined by the supply and demand relationship, depend- states or central banks. The monetary policy is formulated by
ing on the belief that they may be exchanged for a certain the centralized sovereign institution, so that CBDC has the
number of goods or fiat money. Their prices fluctuate so much intrinsic value.
that they cannot act as general equivalents as fiat money issued Transferability: It refers that CBDC can be used as a means
by sovereign institutions. of circulation and payment for ongoing value movements in
Issuance and supply: Decentralized cryptocurrencies are economic activities. In the actual payments, CBDC also needs
issued and distributed by pre-agreed computer protocols, with- to achieve the split maintaining the zero-sum principle for
out the endorsement of sovereign entities. Different protocols more efficient and convenient circulation.
could cause problems such as supply shortages or inflation. Storability: CBDC and the transaction history are securely
Payment method: Cryptocurrencies based on blockchain stored in the form of electronic data in an organization or
appear to enable peer-to-peer payments between users and user’s electronic device for query, payment, exchange and
merchants without the trusted third parties. However, when management.
cryptocurrency is exchanged with other types of currencies, it Offline transaction: It is impossible to achieve complete
is necessary to rely on third-party exchanges, which may pose offline trading like physical currency in the digital world.
security risks. Offline transaction of CBDC specifically means that it may not
Regulatory approach: In decentralized cryptocurrencies, it directly communicate with the host servers or the main system
is difficult to modify and revoke the transactions recorded in when the transaction is performed through the electronic
the ledgers. This is a security attribute of blockchain, but also device, and the payer does not exchange information with
creates conditions for illegal transactions to flourish. Due to the other devices or systems through communication methods such
lack of regulatory means, these cryptocurrencies are likely to as wired or wireless.
be subjected to money laundering, extortion and other crimes. Exchangeability: In the circulation of CBDC in the digital
D. Blockchain in the Field of Payment world, it is also necessary to satisfy the exchangeability,
including the equivalent exchange between one CBDC and
Blockchain is a key innovation in decentralized cryptocur-
other forms of the same sovereign currency, as well as the
rencies [13], allowing remote peer-to-peer value transfers
foreign exchange between CBDC and other sovereign currency
between parties without a trusted third party. The factors that
CBDC.
blockchain may affect the development of payment industry
Controllable regulationIn order to prevent the use of CBDC
and CBDC include:
for the implementation of illegal economic activities, CBDC
Cost: Blockchain-based payment systems may offer lower
also needs to achieve controllable regulation both in terms
transaction cost than other payment methods, especially in
of policy and technology. Although regulation has sacrificed
cross-border payment, currency exchange and other payment
decentralization and anonymity to some extent, it is an impor-
scenarios involving multiple intermediary entities.
tant means of creating a good legal digital currency financial
Usability: Compared with traditional payment methods,
environment.
blockchain-based payment methods have some usability ad-
vantages, because the blockchain makes the transaction pro-
B. Security Properties of CBDC
cess more intuitive and easier to integrate with other services.
Anonymity: Although the blockchain itself does not pro- • No double-spending: No double-spending means that
vide any privacy protection, it provides an effective network once a CBDC owned by a user has been transferred,
architecture for anonymous payment. Some blockchain-based it cannot be used to pay for other transactions. Unlike
cryptocurrency schemes allow users to conduct transactions a physical currency, CBDC, uniquely identified by a
without providing their own real credentials. sequence of serial numbers, can be copied and saved
multiple times. Therefore, no double-spending is the basic
III. K EY F EATURES OF CBDC security that all digital currencies need to consider.
In this section we describe the features of both the currency • Unforgeability: Unforgeability requires that no one can
and security aspects that CBDC needs to meet. The currency falsify CBDCs issued by the sovereign institutions or
functions to be implemented by CBDC include centralized forge a CBDC that is not owned by him/her. These forged
issuance, transferability, storability, offline transaction, ex- CBDCs cannot pass verification. CBDC also requires
changeability, and controllable regulation. Considering the dig- anti-counterfeiting technology to ensure currency secu-
ital nature of CBDC, the security properties it seeks include no rity, just like physical currency.

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• Non-repudiation: Non-repudiation requires that all par- and facilitate the implementation of regulation. The local
ticipants’ actions be recorded from the initiation of the distributed structure can utilize blockchain to solve the central-
transaction to the end, including the payer, the recipient, ized load problem, enrich the financial organization structure,
and the transaction verifier. No one can deny the trans- and provide users with convenient, fast and diverse ways of
action steps that he has completed. payments. It can also increase business interactions between
• VerifiabilityVerifiability requires that all transaction banks and other third-party operators, and enhance the security
records involved in the CBDC system can be validated and trustworthy of CBDC network layer.
effectively. This is crucial for CBDC as a currency of
circulation and a means of payment. It is also the basis C. User Layer
for other security properties. User layer consists of the low-level users and their transac-
• Anonymity: The physical currency is anonymous in ac- tions, which are not only the regulatory objects of regulatory
tual circulation. Similarly, CBDC should also be designed layer, but also the main data source for verification and
for user privacy and anonymity. Throughout the devel- processing of network layer. user layer includes cash exchange,
opment of cryptocurrencies, the anonymity of CBDC CBDC deposit, CBDC withdrawal, inter-bank payment, cross-
mainly includes anonymity of identity and anonymity of bank payment, cross-border payment and currency exchange.
transaction. Intuitively, they require that any unauthorized When the users of user layer submit transactions, they treat the
user cannot obtain, calculate, or infer the identity of a user network layer structure, transaction processing and regulatory
and the information of a transaction through open source operations of the upper layers as black boxes.
data.
V. B USINESS PROCESS FLOW OF CBDC
IV. A B LOCKCHAIN - BASED FRAMEWORK FOR CBDC In this section, we give the business process flow of CBDC
In this section, we present a three-layered CBDC framework throughout the whole lifecycle of issuance, circulation and
based on blockchain, followed by the regulatory layer, network withdrawal.
layer and user layer. It should be noted that in this section, we Fig.1 shows the three-layer structure of CBDC, and illus-
have a rare discussion of the specific blockchain design and trates the main business processes such as identity manage-
other technical details. We assume that enabling capabilities ment, currency issuance, circulation and repatriation in detail.
are available to be incorporated with blockchain, and that the
A. Identity Authentication
blockchain schemes implemented will be secure and scalable
to design targets. Identity authentication is an important means to ensure
operators have legal digital identity, and it is the basis of es-
A. Regulatory Layer tablishing CBDC system framework. Authentication in CBDC
Regulatory layer is the main difference between a CBDC includes the generation of users’ identity, the certificate author-
scheme with centralized issuance and the decentralized cryp- ity ( CA ) of commercial banks and third-party operators. The
tocurrency architecture. Regulatory layer is mainly in charge specific business process is as follows:
for controlling and governing the whole life cycle of CBDC 1. CA issues CA certificates to commercial banks and third
throughout the technical and policy aspects, so as to maintain party operators authorized by the central bank to grant
the healthy and stability of the financial environment dom- them legal digital identities.
inated by CBDC. Regulatory layer mainly includes central 2. Branches in commercial banks that adopt a tree-level
bank, public key infrastructure (PKI) with identity authentica- hierarchy may be sub-branched by their head offices.
tion as the core, and other regulatory bodies such as sovereign The IDs of the branches have the attributes of their head
institutions. They aim to implement the supervision of objects offices.
such as banks and third parties in network layer and users and 3. Users can apply for different identities and account ad-
transaction in user layer. Regulatory layer are not completely dresses through different commercial banks, which have
centralized. Regulatory bodies need to cooperate and restrict corresponding identity attributes of the opening bank.
each other. 4. Users can also apply for a legitimate digital identity
and account address from a third-party operator that has
B. Network Layer obtained a CA certificate. The different IDs of one user
Network layer is a bridge between the top regulators and are associated with the user’s unique physical identity.
ordinary users. It is different from the p2p network structure 5. Central bank can query and verify the identity informa-
mostly adopted by decentralized cryptocurrencies, network tion of a certain institution and user from CA.
layer in CBDC adopts two different network structures. One
is a tree hierarchy structure centered on central bank and B. Currency Issuance
other regulatory agencies, and the other is a local distributed CBDC issuance is functionally similar to coinbase trans-
structure composed of commercial banks and other third-party actions in Bitcoin or mint transactions in Zeracash, except
operators. The centralized tree hierarchy could help CBDC that CBDC is issued by a central bank or a regulatory
better integrate with the existing bank financial structures agency authorized by a sovereign authority which follows a

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Fig. 1. The three-layer architecture and business processes in CBDC

reasonable and legal monetary policy, while currency issuance mercial banks and third-party operators are in charge
in cryptocurrency relies on the protocols agreed in advance. for transaction verification, recording and management of
CBDC issuance adopts a tree hierarchy structure with a central account and wallet during CBDC circulation. Commercial
bank as the root node, and finally reaches the circulation banks and third-party operators also report back to the
among users through commercial banks. The specific business user the results of the transaction execution.
process is as follows. 3. After receiving the transaction submitted by the user,
1. Central bank allocates CBDC to various authorized com- the commercial bank branch verifies it and executes the
mercial banks after signature by mint transaction or other anti-money laundering ( AML ) operations, and then
means. submits the transaction and verification result to the upper
2. The commercial banks will assign the CBDC they re- commercial banks.
ceived to their branches. 4. Commercial banks and third-party operators submit the
3. Finally, users obtain CBDC through currency exchange, verified transactions to the blockchain network, and
withdrawal, and other means. record them in the blockchain ledger through a consensus
CBDC can be stored and used in both wallet-based and protocol.
account-based forms, for the convenience of currency circula- 5. Central bank can access the blockchain ledger and mon-
tion and storage. A user can exchange physical fiat money with itor users’ transactions.
wallet-based CBDC, transfer of CBDC between his wallet and 6. Central bank also supervises all operations of commercial
his account, and exchange physical fiat money with account- banks and third party operators.
based CBDC within the same ID.
D. Currency Withdrawal
C. Currency Circulation
The circulation of CBDC mainly describes the whole busi- CBDC withdrawal is a function of symmetry with CBDC
ness process from the user submitting the CBDC transaction to issuance, reflecting the balance of payments of banks as well
the transaction being finally recorded into blockchain ledger, as the economic situation. CBDC withdrawal is also beneficial
which is the core functionality of CBDC. The specific business to update CBDC versions, enhance functionality and security.
process is as follows: The main process is as follows:
1. A user selects an ID that he/she owns and creates a 1. The third party operators neither directly participate in
transaction on a client provided by a commercial bank CBDC issuance nor directly submit CBDC withdrawal
or a third party operator that corresponds to the ID. to the central bank, but realize CBDC withdrawal and
The transactions users can create include: a. inter-bank expenditure through business dealings with the commer-
payment, b. cross-bank payment, c. cross-border transfer, cial banks.
etc. 2. Commercial banks submit CBDC from the underlying
2. The user submits a transaction to the corresponding branches level by level. Finally, CBDC is reclaimed by
commercial bank branch or third-party operator. Com- central bank in accordance with the monetary policy.

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VI. C ROSS - BORDER PAYMENT BY CBDC or account. If the execution fails, the bank or third party
In order to better introduce the advantages of the CBDC operator of the send feeds back the transaction failure
framework, we provide the use case for cross-border payment message to the sender and unlocks the CBDC.
using CBDC in this section. 8. The regulators may also query, verify and recover the
Cross-border payment refers to the completion of value transaction after the transaction is over.
transfer across geographical boundaries through multiple fiat VII. C ONCLUSION
currencies. It is an important use case for CBDC design. Con-
In this paper, we analyzed the functional differences be-
ducting cross-border payment through CBDC could provide
tween decentralized digital currency and CBDC in detail, and
real-time settlement and reduce costs, enabling new business
then give the security and functional requirements that CBDC
models, and institute new models of regulatory oversight. We
should meet. On this basis, we further proposed a blockchain-
use cross-border payment as a use case to explain the payment
based framework for CBDC with three layers, including the
process of the CBDC framework, as shown in Fig.2.
supervision layer, network layer and user layer. In addition, we
introduced the key business processes of CBDC. Finally, we
introduce the transaction processing flow of CBDC by taking
cross-border payment as an example.
ACKNOWLEDGMENT
We gratefully acknowledge the funding supports from the
National Key Research and Development Program of China
(2018AAA0101400) and the National Natural Science Foun-
dation of China (61533019, 71702182).
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